Supreme Court Approves Online Sales Taxes. Here's What Happens Next

Supreme Court Approves Online Sales Taxes. Here's What Happens Next

© Ralph Freso / Reuters

In a close decision delivered Thursday, the Supreme Court cleared the way for state and local governments to begin collecting sales taxes from online retailers and other merchants who lack a presence in a given locale. The decision could result in billions of dollars in extra tax revenues at the state and local level.

The background: A 1992 court decision exempted retailers who lacked a physical presence in a state, such as catalog merchants, from paying sales taxes. Thursday’s decision overturned that ruling, saying that the omnipresent nature of internet commerce calls for an updated tax structure.

Why it matters: States had long complained that they were losing out on billions of dollars in lost tax revenues, and that the old rules failed to recognize the growing importance of the internet economy. Writing for the majority, Justice Anthony M. Kennedy said that the tax rules had distorted the economy by favoring one group of merchants over another and allowed online retailers to avoid state and local taxes in the range of $8 billion to $33 billion a year.

Where it goes from here: The decision will provide states with more tax revenues, but the overall impact will be small. In a note Thursday, Goldman Sachs analyst Blake Taylor said that most major retailers already pay sales taxes online and states may be slow to pursue the small number of retailers that do not yet do so. As a result, Taylor sees tax revenues increasing gradually by about $13 billion.

The new rules could make it harder for small online retailers to remain independent, since many lack the infrastructure to handle a complex array of taxes applied in over 9,000 jurisdictions, Bloomberg notes. Brick-and-mortar retailers are big winners, and some big internet retailers such as Amazon may come ahead as well as they sell tax-collection services to smaller firms.

Ultimately, the decision may prod Congress to act. Lawmakers have avoided the issue for years, in part because they didn’t want to be seen increasing taxes, but the court’s decision may give them cover to finally establish a coherent set of rules. Dissenting from the decision, Chief Justice John G. Roberts Jr. wrote: “E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”